Articles in This Edition:

• Executing your tenant - Well not exactly...

• Still more lessons from August's case studies.

• Shape up or ship out!  Implementing a Tenant Behavior Modification Program.

• Items to address before attempting to refinance or borrow.

Executing your tenant - Well not exactly...

More like executing “on” your tenant.  It is inevitable that someday you are going to have to evict a tenant.  However, after you have completed the summary process case, obtained judgment against a tenant for possession of their premises, and your tenant has failed to vacate voluntarily, you may still have to evict them forcefully. 

An “eviction” is carried out by an execution on the judgment for possession and requires the services of a state marshal to properly return the premises to you.  So, how does it all happen?

As suggested above, execution against a tenant requires the court process to be complete and a judgment in your favor.  It also requires any statutory or stipulated stay (“delay”) of execution to expire.  Once the stay has expired, if your tenant remains in possession of the premises, you may obtain an execution from the court clerk.  It is that execution that authorizes the state marshal to forcibly remove anyone and anything remaining in the premises.  It is important to note that you may not carry out this removal yourself or hire someone other than a state marshal to do it for you.

Once you or your attorney delivers the execution to the marshal, the process resembles the art of herding cats.  The state marshal will serve the execution on the remaining tenants, giving them notice when he will return to the unit to remove them.  The marshal will then coordinate with the city or town to take custody of the tenants’ belongings when the marshal returns to remove them.  The marshal will also schedule movers to assist with the packing and removing of all of the tenants’ possessions when he returns.  Lastly, the marshal will coordinate with you to ensure easy access to the premises on the specified date.  You are surely the easiest of the lot to coordinate with, but everything else must be in place before you are needed.  With everyone in place and ready to execute, the marshal will return and remove the tenant and their property and turn the unit back over to you.  You are then free to secure the unit as you customarily would, including changing the locks, if necessary.

While this seems straight forward and simple, there are some pitfalls during this process that you should avoid where possible.  Even if you have executed on tenants before, these traps can cost you time and money if you are not attentive. 

§         First, all of the effort, time, and cost associated with the above process are useless and wasted if the tenant vacates voluntarily and returns the keys.  Many owners and managers incur expense and are distracted from other important tasks because they don’t notify the marshal that the tenants have returned the keys.  If the tenant leaves, takes their things, and gives you the keys, you should cancel the cavalry. 

§         Second, if you send rent invoices to your residents as a general practice, you need to create an alternative policy for people you are evicting.  You can have the marshal and his team of associates poised and ready at the door, but if you send the resident a rent invoice and they offer you the rent listed on it, you and your tenant removal team just stepped on a landmine.

§         Third, and similar to number two, accepting payments after the marshal has served the execution can equally cause you problems.  Those of you who faithfully read our newsletter know that we are proponents of taking money a tenant owes you anytime it is offered [read more in "Take the money...It's yours" in our July 2009 newsletter]  This is the one caveat to that policy.  If the execution has been served and you want the tenant out, refuse the payment until after the marshal has returned the premises to your possession.  If you don’t, you may torpedo your execution efforts.

§         Lastly, you cannot remove the resident yourself.  While the speed with which you obtained judgment for possession would impress the staunchest of NASCAR fans, it may feel like you just stepped into some quicksand when it is time to get the tenant out of your unit.  Cities and towns are often backlogged with the number of evictions they must handle and you have every right to be frustrated.  You don’t, however, have any right to take matters into your own hands.  If you try, you will get yourself into deep legal and financial trouble and may be required to keep the tenant you were trying to execute in the first place.

Still more lessons from August's case studies.

We have received dynamic and forceful feedback from our August 2009 Case Studies Edition, particularly about the Connecticut Appellate Court’s June 2008 decision in Sproviero v. J.M. Scott Associates, Inc. [click here to view complete article], which has ranged from “this greatly scares me” to “the system is simply against landlords” to “you must be kidding.” 

There is no need to lose sleep, landlords can prevail and use the system to their advantage, and you need to address it (sooner rather than later).  For commercial landlords and property managers, here are three (3) additional practice and procedure tips that can help you and your clients address this new legal landscape.

First, you must have a plan in place to address the “use and occupancy” determination that Sproviero requires.  Forewarned is forearmed.  Schedule time now to evaluate and determine the gross rent that would apply to the commercial units that you lease out, and review your loss history (insurance claims and general ledger expense accounts relating to maintenance, renovation, and repair/replacement are a good reference point) to determine what additional costs you may experience (and how often) with tenants in those units.  Add those together, and you have a starting point for determining the use and occupancy rate that would apply to a noncompliant tenant receiving a notice to quit.

Second, consulting with your landlord attorney now can greatly help lessen the impact of Sproviero and perhaps even begin the process of getting it reversed.  Lawyers can be their most creative and effective in situations where the developing case law is divorced from basic principles that govern relationships between parties, particularly when the relationship involves a contract (like a lease).  Involve your lawyer now in the plan that you are creating to address Sproviero. 

Lawyers know that trial judges do not like unclear situations, as the judge’s responsibility is to get things done as effectively and efficiently as possible.  Our legal system has hundreds of years of experience with contracts and how they work.  A lawyer experienced in landlord-tenant law can reveal the inconsistency between Sproviero and related-arguments about leases (and a tenant’s violation of them) and that body of contract law, and create a wonderful opportunity to force the court system to clarify the law.  However, lawyers can be most effective when they are given time to plan with their clients to prepare for tenant noncompliance with a lease.

Third, remember the power of a personal guarantee, particularly with small corporate, partnership, or LLC entities.  As we discussed in a previous Landlord Advocate edition regarding student housing (but often equally applicable to commercial leases), a personal guarantee is a wonderful motivating tool to keep a business tenant compliant.

Shape up or ship out!  Implementing a
Tenant Behavior Modification Program.

You have leases and you have rules. You spend lots of time and money to get them in order and get them in place. You review them regularly to ensure they support your efforts to create the community you envisioned and the environment your tenants enjoy. As a result, you expect the people you screen and accept as tenants to want the same things you do. Sometimes however, you and your tenants don’t see eye to eye.

Your vision of the community as expressed in the lease and the rules doesn’t seem to fit the behavioral patterns a particular tenant finds acceptable. Despite a tenant’s signature on the lease - their acknowledgment that they read and agree to follow the rules - and your continued effort to curb their unacceptable behavior, the tenant doesn’t seem willing to toe the line. Well, you may have to execute them [see "Executing your Tenant" in this issue] or, alternatively, offer them a spot in your Tenant Behavior Modification Program.

Many of you have gone through the summary process (“eviction case”) for tenants who don’t pay the rent. In many of those situations, you offer the tenant an opportunity to get current on their rent, pay the fees and costs for which they are responsible, and retain their tenancy if they can stay current on their payments. In so doing, you are giving them the opportunity to change their payment patterns in exchange for allowing them to remain in their unit - providing them a chance to modify their past behavior to comport with your expectations, the lease, and the rules governing rent payment.

This same option is available when the problem is not rent payment, but something else that disrupts your operations. Whether its loud music disturbing other residents, keeping an unauthorized animal, or improper disposal of waste outside their units, the behavior can and should be modified to meet expectations in the same way someone’s rent payment habits can.

You have a system in place that tracks rent payment so you can determine someone’s compliance with your lease and payment policy. You probably also have a system in place that tracks conduct that violates your lease and community rules. Just as you use your payment accounting system to initiate legal action to modify a tenant’s payment habits, you may also use your tenant conduct accounting system to seek modification of lease and rule violations.

The documentation you obtain and maintain when you see improper conduct (or hear of improper conduct from other tenants) is the baseline source for obtaining behavioral change. Apply your system and documentation to get your tenant’s conduct in check and back in line with your expectations the same way you do for those who don’t pay. The legal system in Connecticut is designed to help you make that happen.

You have invested considerable money in providing your tenants with units that everyone in your community can be proud of. You have prepared the units for their tenancy, you screened the applicants to ensure they could live appropriately on your property, and you keep your end of the lease deal by meticulously maintaining the community and its amenities. If your problem tenant wants to remain in their unit, they will gladly accept your offer allowing them to change their conduct instead of being evicted.

Take a moment to determine the top five problems you face with tenants on your property. They may be extreme, they may be simple. If you would otherwise want to retain the tenant if their conduct were to change, consult with your landlord attorney on how best to eliminate the problem behaviors through a court-monitored behavior modification program. The positive impact will be felt throughout the community and many of the other minor concerns you face will start to rectify themselves – allowing you to turn your attention to other concerns on your property.  [TOP]

Items to address before attempting
to refinance or borrow.

Times are tough for some in the residential apartment sector:

• The Wall Street Journal reported that the U.S. apartment vacancy rate rose to a 22-year high (7.5% in the second quarter from 6.1% a year earlier) due to lower apartment demand as unemployment rates around the country continue to rise.

• A panel at this year’s National Apartment Association Education Conference & Exposition reported that the 2009 asset appraisals of apartments equaled 49% of the originating appraisals, which Investor’s Business Daily attributes to declining rents, declining occupancy rates, and fewer available loans.

• In June 2009, Investor’s Business Daily reported that the apartment sector has the highest default rate in the U.S. commercial real estate market. Commercial mortgage-backed securities (“CMBS”) play a large role in the apartment sector and have traditionally had a 1% default rate – in May 2009, the default rate passed 5%.

• CMBS-backed loans were easy to secure with minimal underwriting from 2004-2007. Often, these loans carried 5-7 year terms. Thus, starting this year, many apartment owners are looking to refinance, but are finding a dramatically stricter underwriting environment or no money at all.

What does all this mean for the apartment or other commercial real estate owner facing one or more of these situations? The owner may have to deal with a workout officer or specialist (the people in the banking and CMBS environments who deal with, for example, owners that are facing loan payment default or an inability to refinance) and seek to enter a workout plan to resolve (if possible) the situation.

Workout officers are looking for two (2) basic property management items in evaluating whether to enter a workout plan with the borrower:

(1)   solid rent collection rates (cash flow), including accurate financial reports; and

(2)   a well-maintained property that has addressed unauthorized pets (residential) or use (commercial), housekeeping (residential) or maintenance (commercial), and any water-related issues (both) among the tenants.

At the 2009 NAA Education Conference & Exposition, the representative workout officer of a special loan servicer said bluntly that the presence of delinquent rent among tenants was unacceptable, because cash is king – they are not interested in depreciation or goodwill.  Moreover, rent payment (or lack of it) is a leading indicator in how the tenant maintains (or damages) the apartment.

From an appraised value standpoint (which will impact, in part, how much financing is available), the marketability of the complex will depend on whether smell, pest, and mold issues exist in a residential apartment complex, or environmental/regulatory, system adequacy, or water-related issues in a commercial space, because these are first-impression subjects.  Therefore, workout officers are focusing on how the landlord/borrower is addressing the pets/use, housekeeping/maintenance, and water subjects.

The NAA Convention panel seemed to take issue with oft-stated position that rent collection and these other issues sometimes have to take a back seat to maintaining occupancy rates.  Not surprisingly, the theme was that a well-run property with an occupancy issue would be much more likely to survive the next several years than a property with almost 100% occupancy but low rent collection and maintenance issues.  In short, workout officers will see the occupancy issue as a reflection of the current economic environment, while they will view rent collection and maintenance issues as an indication of a poorly run property.   [TOP]

DISCLAIMER:
The reading of this newsletter does not form an attorney-client relationship. The contents of this newsletter are for informational purposes only and do not constitute legal advice. Nothing in this newsletter is intended to imply or predict the outcome of any legal matter that you may be considering or be involved in. The Landlord Law Firm makes no warranties of any kind regarding the information contained in this newsletter.